According to initial reports, Hurricane Patricia didn't end up causing nearly the damage that the world’s most powerful hurricane could have caused. It is a good reminder, however, for reinsurers of how sudden and unpredictable these events are and how quickly they may result in significant losses.
While natural catastrophe occurrences always pose challenges for international reinsurers based in London, continental Europe and the United States, those issues can be exacerbated where the losses take place in unfamiliar jurisdictions such as Mexico or other Latin American countries, governed by civil law systems that dictate a different approach to claim handling and dispute resolution.
Preparation for these events is key.
In our experience, the following are some of the key issues reinsurers face on natural catastrophe losses in Latin America:
Lack of claim protocols. Following a major disaster, insureds usually do not know how to proceed in terms of notification of the loss to reinsurers, mitigation, securing evidence, not disposing of repaired parts, what documents need to be submitted with the initial loss notification, etc. Claims protocols may be enforceable provided they are included in the reinsurance policy. It is advisable to secure acknowledgment from the insured of the existence of any claim protocol.
Late notification. A reinsurance placement usually involves several layers, including the original insured(s), a retail broker, cedant(s), reinsurance broker(s) and reinsurers (lead and following market). A loss notification often takes days to reach reinsurers. It is advisable to include in the policy the contact details of a specific individual to whom they need to report any loss. The earlier a loss is notified, the more accurate the adjustment will be. Penalties for late notifications are very limited and often difficult to pursue.
Policy documentation not available for immediate access by adjusters/experts. This is a basic issue that arises more often than expected. Even where the policy documents are available, local policies in particular may be in a foreign language and require translation.
Poor or nonexistent liaising with the policyholder for mitigation. In principle, an economic test should be applied to all mitigation actions implemented by the insured, i.e., the insured should spend no more than a dollar to save a dollar. But depending on the specific policy wording and coverages provided, a reinsurer will not always be able to reject mitigation costs that fail the economic test and/or there may be disagreements over whether such costs constitute “extra expense.”
Availability of experts. Reinsurers may struggle to find experts available following a natural catastrophe loss. It is important to have access to a network of local experts.
Poor or lack of evidence for determining the cause of loss and extent of damage. Claims protocols can help the insured secure evidence, but there is little substitute for having qualified experts “on the ground” as soon as possible.
Application of deductibles. Follow on events or events that occur in close succession can present significant issues concerning the number of deductibles that apply.
Delay in startup (DSU) losses. To the extent a policy includes DSU coverage, careful review of the policy wording and an understanding of the facts are required to determine coverage. In major construction projects, insureds may be tempted to attribute to the hurricane or subsequent flood all delays occurred prior to the event or simply contend that the insurer is required to sort it out. Early access to key contemporaneous documents, such as a preloss Primavera schedule and other internal scheduling information, will assist in this determination.
Business interruption. Traditionally, a BI loss can be only triggered by physical damage covered under the policy — not by a general change in economic conditions. In Latin America, however, there is little legal precedent in regard to BI attributed to areawide damage caused by natural disasters.
Deadlines. In an early stage after the event, we recommend reinsurers pay particular attention to deadlines. Several jurisdictions in Latin America set strict deadlines which must be complied with. For example, the insurance law in Peru gives 20 days to adjusters to produce their analysis and conclusions. Also, adjusters have only one opportunity to request further information. Then, reinsurers have 10 days to agree with/challenge the adjusters’ conclusions. Chile and Ecuador also have very restrictive deadlines for adjusters to produce their conclusions and for reinsurers to pronounce on coverage.
30-day rule. In several jurisdictions including Argentina, Brazil, Colombia, Mexico and Peru, once the insured has presented a documented and quantified claim, the insured has 30 days to deny coverage or pay the claim. The trigger for this deadline is not always straightforward. Therefore, the sooner you get an adjuster involved, the better to make sure that you have all the relevant information you will need to accept or deny coverage in due course.
Other deadlines. Reinsurers must also properly consider other potentially applicable deadlines, including reinsurers’ right to cancel the policy in case of risk aggravation or changes in the circumstances, misrepresentation or nondisclosure. If the policy is not timely canceled, reinsurers will be considered as accepting the changes in the circumstances of the risk or the nondisclosed/misrepresented facts.
In light of these issues, the following recommendations may assist reinsurers in preparing for, and dealing with, natural catastrophe losses in Latin America:
1. Establish claim protocols and make sure they are included in the insurance policy. If a claim protocol is part of a policy, compliance is compulsory.
2. Confirm with your underwriter that the underwriting file is complete and all relevant policy wordings and attachments are available for adjusters and other experts.
3. Create channels for direct communication with your cedant and the adjuster in order to address efficiently any request from the policyholder in terms of claim handling and mitigation actions.
4. Claims handlers may consider prearrangements with adjusters to be available following a major disaster and, of course, have a list of “go to” experts that can be available on short notice.
5. For DSU and BI losses, the earlier that forensic accountants or scheduling/construction experts are involved to assess the impact of the event and monitor the development of repairs, the better to properly assess the quantum of the loss.
6. Deadlines. The adjuster should confirm applicable deadlines or involve a lawyer. There are many deadlines, often country-specific, that must be met in due course. Failure to comply with those deadlines could result in a waiver of significant rights.
A recurring theme through these recommendations is that, to be better equipped to deal with a natural catastrophe in Latin America or other foreign jurisdictions, it is critical for international reinsurers to have appropriate internal procedures in place, as well as access to a network of experts familiar with the local practices of the foreign jurisdictions. This will significantly facilitate claim handling and management of disputes when a catastrophe strikes.